Talk me out of buying a house

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Topic Author
Bwlonge
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Joined: Wed Nov 22, 2017 6:36 am

Talk me out of buying a house

Post by Bwlonge »

I currently owner occupy a duplex that is doing very well. I see a couple houses available now that I could likely afford, only to the detriment of my current high savings rate. They're exactly what I THINK I want- 5 acres, interesting architecture, insanely nice mountain views. I see a few problems:

-Permanent lower savings rate immediately
-If I lost my job, or things went south, there isn't an easy way to fully replace my current income. I make almost double the median income for the area and there. I do have relatively good job security-I'm useful and well liked- but I'm not naive enough to think restructuring or other shit doesn't happen.
-PMI via FHA or USDA loan, I don't have much money to put down.

Income:

Current liquid reserves: 13k
Base Income: 70k
Side hustle: 5k
Duplex: 11k annual per side
Currently maxing retirement accounts.
31, single, no kids, ever.
My employer has stated they want to make me the head of reporting in a year or two, currently being done by someone who retired from there.

Expenses:

All duplex costs: very conservative 15k, add 3k for extremely conservative, barring something catastrophic
Car loan: 2k/yr x4 years
Optional graduate online classes: 3300 per class, have 4 more classes to complete over 5 years (potential employer reimbursement)
Living costs: 6k, but call it 10k/yr
The 2 houses I'm looking at are on market for 200k and 300k.
stan1
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Re: Talk me out of buying a house

Post by stan1 »

Sure, you apparantly live in a very low cost of living area. Seems like you are making good decisions. Just a matter of what you want. If you'd live in the house with the acreage and view for the rest of your life you have the flexibility to do so.
almostretired1965
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Re: Talk me out of buying a house

Post by almostretired1965 »

Wouldn't you be able to rent out the part of the duplex you currently occupy and double the rental income? I would think that'd cover at least half of your new mortgage.

Now I would never do it since I have a pathological fear of being a landlord, but it sounds like you know what you are doing ....

A
Topic Author
Bwlonge
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Re: Talk me out of buying a house

Post by Bwlonge »

almostretired1965 wrote: Tue Sep 04, 2018 12:44 pm Wouldn't you be able to rent out the part of the duplex you currently occupy and double the rental income? I would think that'd cover at least half of your new mortgage.

Now I would never do it since I have a pathological fear of being a landlord, but it sounds like you know what you are doing ....

A
That's right.

Being a landlord hasn't been so bad so far. I have a great tenant screening system (knock on wood) and I did the numbers conservatively to begin with and I bought at the right time to catch the current upswing the area is seeing. That being said, I'm not in a hurry to expand my landlording career yet, I'm happy having one good one for diversification for now.
bloom2708
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Re: Talk me out of buying a house

Post by bloom2708 »

It sounds like you already bought a house. It is a 2 unit "house". You rent out one of the units.

You need a place to sleep, eat, watch TV, store your clothes and stuff. That can be a single family home (what you are likely referring to), a multi-unit home, a condo, a rented house or apartment, a rented room, a camper or a tent.

If you like where you live and have enough space, then I would stand pat until "something" changes that requires a change.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
JBTX
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Re: Talk me out of buying a house

Post by JBTX »

Bwlonge wrote: Tue Sep 04, 2018 12:33 pm I currently owner occupy a duplex that is doing very well. I see a couple houses available now that I could likely afford, only to the detriment of my current high savings rate. They're exactly what I THINK I want- 5 acres, interesting architecture, insanely nice mountain views. I see a few problems:

-Permanent lower savings rate immediately
-If I lost my job, or things went south, there isn't an easy way to fully replace my current income. I make almost double the median income for the area and there. I do have relatively good job security-I'm useful and well liked- but I'm not naive enough to think restructuring or other shit doesn't happen.
-PMI via FHA or USDA loan, I don't have much money to put down.

Income:

Current liquid reserves: 13k
Base Income: 70k
Side hustle: 5k
Duplex: 11k annual per side
Currently maxing retirement accounts.
31, single, no kids, ever.
My employer has stated they want to make me the head of reporting in a year or two, currently being done by someone who retired from there.

Expenses:

All duplex costs: very conservative 15k, add 3k for extremely conservative, barring something catastrophic
Car loan: 2k/yr x4 years
Optional graduate online classes: 3300 per class, have 4 more classes to complete over 5 years (potential employer reimbursement)
Living costs: 6k, but call it 10k/yr
The 2 houses I'm looking at are on market for 200k and 300k.
- with 5 acres, you will likely spend most of your weekends tending to it. If that is what you want, fine.
- when you have a home like that, you will spend more time at home vs socializing. Not sure that is a good thing for somebody that is single.
- While your house will likely retain its value, all the furniture and knick knacks you buy to fill it won't - and that can easily be in the tens of thousands of dollars.
- Great views are nice. But realistically, how much time are you going to spend looking at the views, and how much is that worth? When we were looking at our first house decades ago, we really wanted a lot of trees. Now...yes, we like trees, but its not as if we spend a lot of time "experiencing" the trees.
psteinx
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Re: Talk me out of buying a house

Post by psteinx »

Managing 2 units of a duplex that you no longer live in will likely be more than 2x more frustration and effort versus managing 1 unit of a duplex where you live on the other side.
Independent George
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Re: Talk me out of buying a house

Post by Independent George »

You are also unmarried and only 31 years old. If/when you get a spouse, where you want to live should be a decision you make together.
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wabbajack
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Re: Talk me out of buying a house

Post by wabbajack »

JBTX wrote: Tue Sep 04, 2018 1:04 pm - While your house will likely retain its value, all the furniture and knick knacks you buy to fill it won't - and that can easily be in the tens of thousands of dollars.
Disagree. Your parcel of land will retain its value, or change in price as the neighborhood becomes more/less desirable. The physical building will only depreciate and will never be worth more than what it cost to build. Plus, you have to maintain it or it would depreciate even further.

I just bought a house. Single. Dog. Good income. LCOL. If it wasn't for the dog, I wouldn't have done more than window shop. The best part? My dog doesn't know what to do with a backyard because he was leash trained since 8 weeks. :|
gougou
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Re: Talk me out of buying a house

Post by gougou »

A house with 5 acres of land may be too special to resell (hard to sell for a fair price). You may want to consider a house that's more standard and in a good location. And if for whatever reason you need to sell, it won't be too difficult to sell for a fair price, and worst case you can rent it out.
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djpeteski
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Re: Talk me out of buying a house

Post by djpeteski »

There is a third choice...wait. Put yourself in a better position, financially, then reevaluate. Buying with no down payment is dicey.
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Bwlonge
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Re: Talk me out of buying a house

Post by Bwlonge »

gougou wrote: Tue Sep 04, 2018 2:01 pm A house with 5 acres of land may be too special to resell (hard to sell for a fair price). You may want to consider a house that's more standard and in a good location. And if for whatever reason you need to sell, it won't be too difficult to sell for a fair price, and worst case you can rent it out.
I was wondering that. These are in a pretty rural location and the time on market in this county is several times higher than other counties in the state. I feel like I would only pull the trigger on something negotiated well in my favor, to cover my end when I need to negotiate down upon selling.
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Bwlonge
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Re: Talk me out of buying a house

Post by Bwlonge »

wabbajack wrote: Tue Sep 04, 2018 1:38 pm
JBTX wrote: Tue Sep 04, 2018 1:04 pm - While your house will likely retain its value, all the furniture and knick knacks you buy to fill it won't - and that can easily be in the tens of thousands of dollars.
Disagree. Your parcel of land will retain its value, or change in price as the neighborhood becomes more/less desirable. The physical building will only depreciate and will never be worth more than what it cost to build. Plus, you have to maintain it or it would depreciate even further.

I just bought a house. Single. Dog. Good income. LCOL. If it wasn't for the dog, I wouldn't have done more than window shop. The best part? My dog doesn't know what to do with a backyard because he was leash trained since 8 weeks. :|
Yeah, I think a dog would be in the equation. I said I wouldn't get one until I had a yard.
staythecourse
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Re: Talk me out of buying a house

Post by staythecourse »

Independent George wrote: Tue Sep 04, 2018 1:29 pm You are also unmarried and only 31 years old. If/when you get a spouse, where you want to live should be a decision you make together.
I tend to agree. What NEED is there for a single person to buy a SFH even a small one let alone one on 5 acres? You don't need the room. You don't need the school system. There is a chance of meeting someone where you may need to move and/ or want something different in the future in terms of housing needs.

This along with the fact you admit if something happens to your job it will be difficult to replace the income makes it a no no. I don't know what will happen in your life, but can GUARANTEE you won't be in your current gig for the next 30 years until you are in your 60's. If it was me I would keep up with the savings and figure out how to make even more money (more education) then worry about having a nice mountain view.

Good luck.
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Bwlonge
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Re: Talk me out of buying a house

Post by Bwlonge »

staythecourse wrote: Tue Sep 04, 2018 3:42 pm
Independent George wrote: Tue Sep 04, 2018 1:29 pm You are also unmarried and only 31 years old. If/when you get a spouse, where you want to live should be a decision you make together.
I tend to agree. What NEED is there for a single person to buy a SFH even a small one let alone one on 5 acres? You don't need the room. You don't need the school system. There is a chance of meeting someone where you may need to move and/ or want something different in the future in terms of housing needs.

This along with the fact you admit if something happens to your job it will be difficult to replace the income makes it a no no. I don't know what will happen in your life, but can GUARANTEE you won't be in your current gig for the next 30 years until you are in your 60's. If it was me I would keep up with the savings and figure out how to make even more money (more education) then worry about having a nice mountain view.

Good luck.
This is almost the exact line of reasoning I know I'm going to end up going with. I need even less space than I have now. I definitely don't need 5 acres to manage. I don't need a school system. And there is every reason to believe I won't keep any property I buy now through the term of the loan, and every reason to believe I won't be in this area forever.

If I develop my career over the next 3-5 years, and stay in the duplex, I will at that point have a strong portfolio and enough FU money to do any number of things.

I think my fundamental problem is that I need to adjust to actually having money. I've lived my life without accumulating, and now that the numbers are getting bigger in the account, I get the feeling like I'm not using it enough so I get antsy and look for reasons to spend it.
Socal77
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Re: Talk me out of buying a house

Post by Socal77 »

Bwlonge wrote: Tue Sep 04, 2018 4:01 pm
staythecourse wrote: Tue Sep 04, 2018 3:42 pm
Independent George wrote: Tue Sep 04, 2018 1:29 pm You are also unmarried and only 31 years old. If/when you get a spouse, where you want to live should be a decision you make together.
I tend to agree. What NEED is there for a single person to buy a SFH even a small one let alone one on 5 acres? You don't need the room. You don't need the school system. There is a chance of meeting someone where you may need to move and/ or want something different in the future in terms of housing needs.

This along with the fact you admit if something happens to your job it will be difficult to replace the income makes it a no no. I don't know what will happen in your life, but can GUARANTEE you won't be in your current gig for the next 30 years until you are in your 60's. If it was me I would keep up with the savings and figure out how to make even more money (more education) then worry about having a nice mountain view.

Good luck.
This is almost the exact line of reasoning I know I'm going to end up going with. I need even less space than I have now. I definitely don't need 5 acres to manage. I don't need a school system. And there is every reason to believe I won't keep any property I buy now through the term of the loan, and every reason to believe I won't be in this area forever.

If I develop my career over the next 3-5 years, and stay in the duplex, I will at that point have a strong portfolio and enough FU money to do any number of things.

I think my fundamental problem is that I need to adjust to actually having money. I've lived my life without accumulating, and now that the numbers are getting bigger in the account, I get the feeling like I'm not using it enough so I get antsy and look for reasons to spend it.
It sounds like you'd most likely become financially independent faster by not getting the house.
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Watty
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Re: Talk me out of buying a house

Post by Watty »

Unless I missed it I didn't see how much you could clear, after taxes, if you sold the duplex.

Likewise there was not a lot of information on if there was a mortgage the other numbers for the duplex to help decide if keeping it makes good business sense.

If you cannot make a slam dunk strong case for keeping the duplex as a rental then I would sell it.

A few potential "Gocha's" to watch out for.

1) You may be getting some sort of owner occupied property tax break on the duplex that you would lose if you moved.

2) Are you sure you can qualify for a mortgage on the new place if you keep the duplex?

3) You mentioned taking an online class. Do the houses have relatively high speed internet available? Many rural areas have limited internet options.
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Bwlonge
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Re: Talk me out of buying a house

Post by Bwlonge »

Watty wrote: Tue Sep 04, 2018 4:12 pm Unless I missed it I didn't see how much you could clear, after taxes, if you sold the duplex.

Likewise there was not a lot of information on if there was a mortgage the other numbers for the duplex to help decide if keeping it makes good business sense.

If you cannot make a slam dunk strong case for keeping the duplex as a rental then I would sell it.

A few potential "Gocha's" to watch out for.

1) You may be getting some sort of owner occupied property tax break on the duplex that you would lose if you moved.

2) Are you sure you can qualify for a mortgage on the new place if you keep the duplex?

3) You mentioned taking an online class. Do the houses have relatively high speed internet available? Many rural areas have limited internet options.
All good points. I was assuming I could make the case for keeping the duplex to a lender. If I couldn't and I had to sell it, I probably wouldn't move forward anyway. And yes, the owner occupied tax breaks are pretty nifty.
Jack FFR1846
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Re: Talk me out of buying a house

Post by Jack FFR1846 »

What's the land like? Why do you want this big of a parcel? Can you make money on it or reduce taxes by following some easy rules?

Personally, 5 acres is too small. In my state, I need 10 acres to put under forest management to reduce property tax on that portion by 90%. I've got that now with a bit over 13. I have town water and FIOS so it's not like I moved to Uganda or something. In my case, the house is well away from the road (not visible at all) and the yard is small. Lots of woods. So some advantages like being able to let the grass grow till I feel like mowing it and not having busy bodies from some HOA telling me what I can't do.
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bloom2708
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Re: Talk me out of buying a house

Post by bloom2708 »

Bwlonge wrote: Tue Sep 04, 2018 4:01 pm I think my fundamental problem is that I need to adjust to actually having money. I've lived my life without accumulating, and now that the numbers are getting bigger in the account, I get the feeling like I'm not using it enough so I get antsy and look for reasons to spend it.
To retire (early or otherwise) save as much as you can as often as you can.

Investing in Total Market stock and bond indexes (Total US, Total International, Total US Bond) and letting them work for you (passive investing) is what we "sell" here. Low costs, buy the market, passive, tax efficient, built for the long run.

Take the amount of risk (mix of stocks and bonds) appropriate for your age, amount invested and risk tolerance. Rebalance if you get "off" and keep saving. It is a winning strategy. :wink:
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Bwlonge
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Re: Talk me out of buying a house

Post by Bwlonge »

Jack FFR1846 wrote: Tue Sep 04, 2018 4:40 pm What's the land like? Why do you want this big of a parcel? Can you make money on it or reduce taxes by following some easy rules?

Personally, 5 acres is too small. In my state, I need 10 acres to put under forest management to reduce property tax on that portion by 90%. I've got that now with a bit over 13. I have town water and FIOS so it's not like I moved to Uganda or something. In my case, the house is well away from the road (not visible at all) and the yard is small. Lots of woods. So some advantages like being able to let the grass grow till I feel like mowing it and not having busy bodies from some HOA telling me what I can't do.
Are you in MA because I am and I've wanted to go Chapter 61 since I learned about it in 9th grade.
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aspirit
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Re: Talk me out of buying a house

Post by aspirit »

With proper tenant screening you can rent both units above ground and live in its basement unit or attic unit you fabricate to live in and be a real mmmustache PCmonkey, ....in your shoes @31 I would have done it already! :happy

Run some rough numbers.
Your plan sounds wise buying & selling w/optimal taxation & a exit strategy.
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wabbajack
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Re: Talk me out of buying a house

Post by wabbajack »

Bwlonge wrote: Tue Sep 04, 2018 3:31 pm Yeah, I think a dog would be in the equation. I said I wouldn't get one until I had a yard.
I don't know what your philosophy is for dog training, but I live in a city neighborhood and I always have my dog on a leash unless in a gated or otherwise secure area. If you live out in the middle of nowhere, and you want your dog to roam (which both the law and I personally frown upon), 5 acres is still way too much space. A dog can and will thrive just as well in a 2BR apartment as a farm.
dknightd
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Re: Talk me out of buying a house

Post by dknightd »

Bwlonge wrote: Tue Sep 04, 2018 12:33 pm I currently owner occupy a duplex that is doing very well. I see a couple houses available now that I could likely afford, only to the detriment of my current high savings rate. They're exactly what I THINK I want- 5 acres, interesting architecture, insanely nice mountain views. I see a few problems:

-Permanent lower savings rate immediately
-If I lost my job, or things went south, there isn't an easy way to fully replace my current income. I make almost double the median income for the area and there. I do have relatively good job security-I'm useful and well liked- but I'm not naive enough to think restructuring or other shit doesn't happen.
-PMI via FHA or USDA loan, I don't have much money to put down.

Income:

Current liquid reserves: 13k
Base Income: 70k
Side hustle: 5k
Duplex: 11k annual per side
Currently maxing retirement accounts.
31, single, no kids, ever.
My employer has stated they want to make me the head of reporting in a year or two, currently being done by someone who retired from there.

Expenses:

All duplex costs: very conservative 15k, add 3k for extremely conservative, barring something catastrophic
Car loan: 2k/yr x4 years
Optional graduate online classes: 3300 per class, have 4 more classes to complete over 5 years (potential employer reimbursement)
Living costs: 6k, but call it 10k/yr
The 2 houses I'm looking at are on market for 200k and 300k.
I don't think you need our help talking yourself out of buying a(nother) house. Wait until you can comfortably afford it. Keep looking, it will give you a better idea of what is available. No need to rush into this. My advise is DO NOT DO IT until you are sure you can afford it, and it is a place you really want to live in for 10 years. Does that help?
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds. Retired 9/19. Still working on mortgage payoff.
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Bwlonge
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Re: Talk me out of buying a house

Post by Bwlonge »

dknightd wrote: Tue Sep 04, 2018 7:22 pm
Bwlonge wrote: Tue Sep 04, 2018 12:33 pm I currently owner occupy a duplex that is doing very well. I see a couple houses available now that I could likely afford, only to the detriment of my current high savings rate. They're exactly what I THINK I want- 5 acres, interesting architecture, insanely nice mountain views. I see a few problems:

-Permanent lower savings rate immediately
-If I lost my job, or things went south, there isn't an easy way to fully replace my current income. I make almost double the median income for the area and there. I do have relatively good job security-I'm useful and well liked- but I'm not naive enough to think restructuring or other shit doesn't happen.
-PMI via FHA or USDA loan, I don't have much money to put down.

Income:

Current liquid reserves: 13k
Base Income: 70k
Side hustle: 5k
Duplex: 11k annual per side
Currently maxing retirement accounts.
31, single, no kids, ever.
My employer has stated they want to make me the head of reporting in a year or two, currently being done by someone who retired from there.

Expenses:

All duplex costs: very conservative 15k, add 3k for extremely conservative, barring something catastrophic
Car loan: 2k/yr x4 years
Optional graduate online classes: 3300 per class, have 4 more classes to complete over 5 years (potential employer reimbursement)
Living costs: 6k, but call it 10k/yr
The 2 houses I'm looking at are on market for 200k and 300k.
I don't think you need our help talking yourself out of buying a(nother) house. Wait until you can comfortably afford it. Keep looking, it will give you a better idea of what is available. No need to rush into this. My advise is DO NOT DO IT until you are sure you can afford it, and it is a place you really want to live in for 10 years. Does that help?
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jimb_fromATL
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Re: Talk me out of buying a house

Post by jimb_fromATL »

It sounds like you have a great thing going by living in one half and renting out the other half of the duplex. But with so little cash reserves even the minimum FHA down payment will result in mortgage payments so high that they are likely to prevent you from qualifying for the new loan if you keep the existing mortgage on the duplex too.

How much do you actually clear from the rent?
How much do you owe on the duplex?
What is the payment?
How much are the taxes and insurance, maintenance and repairs?
How long has it been rented out?

Here's the problem:

Most lenders allow your front-end ratio (the cost of housing alone) to be 28% of your gross income. FHA allows up to about 31%. The potential deal killer for you is the back-end ratio. Most normal loans allow all of your recurring payments including your home and any other debts like car payments, student loans, etc. to be up to 36% of your gross income. (FHA allows up to 43%).

If you have proof of the incoming rent for about two years, a lender will probably consider the net income after expenses in determining your DTI (Debt To Income) ratio. But lenders are not in business to speculate on potential rental income, so they will not consider the rent that you expect to get for the second half of the duplex. So the big problem is qualifying for a new mortgage while keeping the mortgage on the duplex.

It's also a good idea to have at least 6 months or more of living expenses in cash reserves for emergencies. If you deplete your cash for even the minimum down payment, you won't have enough left to pay make the mortgage payments if there are any vacancies or unexpected expenses for repairs to your properties or yourself.

Consider these numbers:
  • For a home selling for $300,000 with 3.5% down ($10,500) the balance to finance would be $289,500. Adding 1.75% ($5,066) for the FHA up-front mortgage premium and 1.5% closing costs rolled into the loan would make the mortgage a total of $298,909. You'll have $10,500 due at closing -- plus prepaid proportions for the first partial month's interest and escrow for taxes and insurance.

    At perhaps 4.5% for 30 years the payment for P&I would be $1515 per month. The mortgage insurance premium at perhaps 0.8% of the loan balance would be around $193 per month. Adding perhaps 1.5% of the home's value for taxes and insurance ($250 tax and $125 insurance = $375 escrow per month) would give you a total payment of $2,083 per month.

    Assuming no HOA or other recurring fees, this makes your housing cost $2083 month for qualifying for the loan. Allowing perhaps 1% of the home's value for annual maintenance and repair expenses, would add another $250 per month you'd need to be able to set aside. That's a total of about $2,333 per month to own the home, and that's before you heat it cool it and furnish it.

    At the normal lender guideline of about 28% debt to income ratio for the home, and if the lender does not count the maintenance allowance, the $2083 per month ($24,990 per year) for housing cost would require an income of about $7,438 per month, $89,251 per year to qualify for the loan. If the lender includes the maintenance allowance in qualifying, your income would need to be about $99,965 per year.

You say the costs for the duplex are up to $18,000.

Adding $24,990 per year for buying the $300,000 home plus $2000 for the car loan makes your total yearly obligation $44,990 per year. At the maximum backend ratio of 36% you'd need to have $124,973 per year income to qualify for the mortgage. For the FHA's 41% back end ratio, you'd need to have proven income of $109,732.

Assuming the lender will consider the whole $11,000 of proven rental income, your total income for qualifying would be about $81,000. Even with the extra $11K (which no lender is likely to consider up front) your income won't come anywhere close enough to qualify for the new mortgage on the $300K home.

How about the $200K property?
  • For a home selling for $200,000 with 3.5% down ($7,000) the balance to finance would be $193,000. Adding 1.75% ($3,378) for the up-front mortgage premium and 1.5% closing costs rolled into the loan would make the mortgage a total of $199,273.

    At perhaps 4.5% for 30 years the payment for P&I would be $1010 per month. The mortgage insurance premium at an estimated 0.8% of the loan balance would be around $129 per month. Adding perhaps 1.5% of the home's value for taxes and insurance ($167 tax and $83 insurance = $250 escrow per month) would give you a total payment of $1,388 per month.

    Allowing perhaps 1.% of the home's value for annual maintenance and repair expenses, would add another $167 per month you'd need to be able to set aside. That's a total of about $1,555 per month to own the home. You say the costs for the duplex are $18,000.

    Adding $16,660 per year for the $200,000 home plus $2000 for the car loan makes your total yearly obligation $36,660 per year. At the maximum backend ratio of 36% you'd need to have $101,834 per year income to qualify. For the FHA's 41% back end ratio, you'd need to have proven income of $89,415.

    As shown above, and assuming the lender will consider the whole $11,000 of proven rental income, your total income for qualifying would be about $81,000.
Some lenders will allow higher DTI ratios, but that's when the borrower has a lot of spare income left for day-to-day living. In this case that does not seem likely when you will be "house poor" and depending on potential extra rent that is not yet proven or "seasoned" enough to be considered.

So to me it seems like even if you can qualify for the mortgage, you cannot really afford it.

I think you have a good thing going now with living in the one half and renting out the other half of the duplex. But to buy either of those bigger properties … in the unlikely event that you can get a mortgage … you'd have to give up virtually all savings for retirement and risk losing it all if you were to fall on any kind of financial hard times such as bad health or accident, job loss or cut in pay, or a deadbeat or bad tenant who takes a while to evict and may trash the place too.

jimb
lazydavid
Posts: 3597
Joined: Wed Apr 06, 2016 1:37 pm

Re: Talk me out of buying a house

Post by lazydavid »

Bwlonge wrote: Tue Sep 04, 2018 4:01 pm I think my fundamental problem is that I need to adjust to actually having money. I've lived my life without accumulating, and now that the numbers are getting bigger in the account, I get the feeling like I'm not using it enough so I get antsy and look for reasons to spend it.
There are far cheaper and less permanent ways to scratch the itch than buying a house on 5 acres. Find a moderately expensive hobby that you're passionate about. It'll cost far less than buying a house, cost can immediately go to zero on most of them if your income drops, and you should get significant enjoyment out of it.
Topic Author
Bwlonge
Posts: 267
Joined: Wed Nov 22, 2017 6:36 am

Re: Talk me out of buying a house

Post by Bwlonge »

lazydavid wrote: Wed Sep 05, 2018 10:09 am
Bwlonge wrote: Tue Sep 04, 2018 4:01 pm I think my fundamental problem is that I need to adjust to actually having money. I've lived my life without accumulating, and now that the numbers are getting bigger in the account, I get the feeling like I'm not using it enough so I get antsy and look for reasons to spend it.
There are far cheaper and less permanent ways to scratch the itch than buying a house on 5 acres. Find a moderately expensive hobby that you're passionate about. It'll cost far less than buying a house, cost can immediately go to zero on most of them if your income drops, and you should get significant enjoyment out of it.
Great advice. That's exactly what I did. I finished painting a hallway this weekend and ordered a new wall light and area rug. Gives me the sensation of something new and nice while making my current asset more valuable and is much less expensive than buying a house.
Topic Author
Bwlonge
Posts: 267
Joined: Wed Nov 22, 2017 6:36 am

Re: Talk me out of buying a house

Post by Bwlonge »

jimb_fromATL wrote: Wed Sep 05, 2018 8:45 am It sounds like you have a great thing going by living in one half and renting out the other half of the duplex. But with so little cash reserves even the minimum FHA down payment will result in mortgage payments so high that they are likely to prevent you from qualifying for the new loan if you keep the existing mortgage on the duplex too.

How much do you actually clear from the rent?
How much do you owe on the duplex?
What is the payment?
How much are the taxes and insurance, maintenance and repairs?
How long has it been rented out?

Here's the problem:

Most lenders allow your front-end ratio (the cost of housing alone) to be 28% of your gross income. FHA allows up to about 31%. The potential deal killer for you is the back-end ratio. Most normal loans allow all of your recurring payments including your home and any other debts like car payments, student loans, etc. to be up to 36% of your gross income. (FHA allows up to 43%).

If you have proof of the incoming rent for about two years, a lender will probably consider the net income after expenses in determining your DTI (Debt To Income) ratio. But lenders are not in business to speculate on potential rental income, so they will not consider the rent that you expect to get for the second half of the duplex. So the big problem is qualifying for a new mortgage while keeping the mortgage on the duplex.

It's also a good idea to have at least 6 months or more of living expenses in cash reserves for emergencies. If you deplete your cash for even the minimum down payment, you won't have enough left to pay make the mortgage payments if there are any vacancies or unexpected expenses for repairs to your properties or yourself.

Consider these numbers:
  • For a home selling for $300,000 with 3.5% down ($10,500) the balance to finance would be $289,500. Adding 1.75% ($5,066) for the FHA up-front mortgage premium and 1.5% closing costs rolled into the loan would make the mortgage a total of $298,909. You'll have $10,500 due at closing -- plus prepaid proportions for the first partial month's interest and escrow for taxes and insurance.

    At perhaps 4.5% for 30 years the payment for P&I would be $1515 per month. The mortgage insurance premium at perhaps 0.8% of the loan balance would be around $193 per month. Adding perhaps 1.5% of the home's value for taxes and insurance ($250 tax and $125 insurance = $375 escrow per month) would give you a total payment of $2,083 per month.

    Assuming no HOA or other recurring fees, this makes your housing cost $2083 month for qualifying for the loan. Allowing perhaps 1% of the home's value for annual maintenance and repair expenses, would add another $250 per month you'd need to be able to set aside. That's a total of about $2,333 per month to own the home, and that's before you heat it cool it and furnish it.

    At the normal lender guideline of about 28% debt to income ratio for the home, and if the lender does not count the maintenance allowance, the $2083 per month ($24,990 per year) for housing cost would require an income of about $7,438 per month, $89,251 per year to qualify for the loan. If the lender includes the maintenance allowance in qualifying, your income would need to be about $99,965 per year.

You say the costs for the duplex are up to $18,000.

Adding $24,990 per year for buying the $300,000 home plus $2000 for the car loan makes your total yearly obligation $44,990 per year. At the maximum backend ratio of 36% you'd need to have $124,973 per year income to qualify for the mortgage. For the FHA's 41% back end ratio, you'd need to have proven income of $109,732.

Assuming the lender will consider the whole $11,000 of proven rental income, your total income for qualifying would be about $81,000. Even with the extra $11K (which no lender is likely to consider up front) your income won't come anywhere close enough to qualify for the new mortgage on the $300K home.

How about the $200K property?
  • For a home selling for $200,000 with 3.5% down ($7,000) the balance to finance would be $193,000. Adding 1.75% ($3,378) for the up-front mortgage premium and 1.5% closing costs rolled into the loan would make the mortgage a total of $199,273.

    At perhaps 4.5% for 30 years the payment for P&I would be $1010 per month. The mortgage insurance premium at an estimated 0.8% of the loan balance would be around $129 per month. Adding perhaps 1.5% of the home's value for taxes and insurance ($167 tax and $83 insurance = $250 escrow per month) would give you a total payment of $1,388 per month.

    Allowing perhaps 1.% of the home's value for annual maintenance and repair expenses, would add another $167 per month you'd need to be able to set aside. That's a total of about $1,555 per month to own the home. You say the costs for the duplex are $18,000.

    Adding $16,660 per year for the $200,000 home plus $2000 for the car loan makes your total yearly obligation $36,660 per year. At the maximum backend ratio of 36% you'd need to have $101,834 per year income to qualify. For the FHA's 41% back end ratio, you'd need to have proven income of $89,415.

    As shown above, and assuming the lender will consider the whole $11,000 of proven rental income, your total income for qualifying would be about $81,000.
Some lenders will allow higher DTI ratios, but that's when the borrower has a lot of spare income left for day-to-day living. In this case that does not seem likely when you will be "house poor" and depending on potential extra rent that is not yet proven or "seasoned" enough to be considered.

So to me it seems like even if you can qualify for the mortgage, you cannot really afford it.

I think you have a good thing going now with living in the one half and renting out the other half of the duplex. But to buy either of those bigger properties … in the unlikely event that you can get a mortgage … you'd have to give up virtually all savings for retirement and risk losing it all if you were to fall on any kind of financial hard times such as bad health or accident, job loss or cut in pay, or a deadbeat or bad tenant who takes a while to evict and may trash the place too.

jimb
That is the most thorough reality check I've ever had. Thank you! Very impressive analysis and wisdom!!!
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